1. financial statements demystified

2. p 24 Summary of the Three Financial Statements Cash Flow Statement Formula P = R - E where: R is revenue E is expenses Formula Cash: In (Out) History of revenue less expenses over a year Snapshot at balance sheet date History of cash in less cash out over a year Formula L + E = A or E = A - L where: A is assets L is liabilities E is equity Income Statement Balance Sheet

3. financial statements demystified

4. The Accounting Information Flow Source documents Journals General ledger Trial balance Y/e adjustments Reports Subsidiary ledgers

5. financial statements demystified

6. Reporting Principles Top down Less is more Eg – A4 overview, summary level financial statements Exception reporting, eg – current ratio reported when under 1.2 (have to trust system)

7. financial statements demystified Reporting Principles Top down A4 overview includes: info from 3 financial statements crucial KPIs

8. financial statements demystified Reporting Principles Top down Performance dashboard is an automated version Limit info to key performance elements updated daily Automate – link to robust, reliable, integrated systems

9. financial statements demystified Reporting Principles Future and Past Reporting enhanced when: In context of strategy 5 year corporate plan Annual financial budget Actual YTD (& month) IS – also CF forecast, BS, ratios, KPIs 5 year review IS, CF, BS & ratios Same format for budgets & historic reporting

10. financial statements demystified Reporting Principles Future and Past Why five years: Analysts recommend 5 years, 3 minimum We think better in context Review budgets in context: Consider having 3 prior years instead of just last year’s actual Obtaining more comprehensive reporting: Add historic YTD cash flow statement reporting Add views generated through Excel spreadsheets Obtain assurance

11. financial statements demystified Reporting Principles Clustering (of expenses) University CollegeMember Association BuildingAssociation StaffBoard/council Office & administrationOffice Student servicesMember services Student education & supportMember benefits

12. financial statements demystified NFP Example Annual BudgetRegular Reporting 2 pages --- overall explanation / recommendations 3 pages of financial statements - -- IS, BS & CF 1 page --- income statement same format ----- 3 pages --- specific commentary on actual variances to budget 11 pages --- explanation of each revenue & expense line 2 pages --- membership generation, surplus history and ratios (graphical form)

13. financial statements demystified

14. Analysing Financial Statements Stages of analysis: 1Review annual report 2Enter numbers in spreadsheet 3Analyse performance over time

15. financial statements demystified Analyse Performance Over Time Profit performance: Trend in sales Nature of unusual items Trend in profit Segment performance Likely future sales and profit

16. financial statements demystified Smith Family - Income Statement Years2008 $m 2009 $m 2010 $m 2011 $m 2012 $m Revenue Sales322915 16 Government grants991217 Fund raising3836374344 Other77677 Total revenue8681708284 Expenses Community programs(37)(38)(41)(51)(54) Commercial(30)(28)(12)(13)(16) Fund raising(8)(7)(8)(9)(10) Positioning(3) (2) (3) Other(7)(8)(7) (6) Total expenses(85)(84)(70)(82)(89) Surplus1(3)--(5)

17. financial statements demystified Analyse Performance Over Time Cash flow performance: Strength of net operating cash flows Evidence of self generation: op CF pays for dividends and fixed assets Financing of expansions and acquisitions Extent of borrowings and their repayment Likely future operating cash inflows, self-generation, borrowings and/or cash change

18. financial statements demystified Smith Family – Cash Flow Statement Years2008 $m 2009 $m 2010 $m 2011 $m 2012 $m Operating activities-(1)466 Investing activities Payments for PP&E(1) (2)(1) Proceeds PP&E12 Net investments(7)1 Net investing(7)(1)1(2)- Financing activities Repayment borrowings(2)(1) Net financing(2)(1) Net change cash(9)(3)435 Cash at beginning211291316 Cash at end129131621

19. financial statements demystified Analyse Performance Over Time Balance sheet performance: Trend in total assets - which assets cause it? Trend in total liabilities - which liabilities cause it? Trend in level and elements of equity

20. financial statements demystified Smith Family – Balance Sheet Years2008 $m 2009 $m 2010 $m 2011 $m 2012 $m Assets Current2318232624 Non-current2322241920 Total assets4640474544 Liabilities Current1312172023 Non-current32111 Total liabilities1614182124 Net assets3026292420 Equity3026292420

21. financial statements demystified

22. Analyse Performance Over Time Analysis of ratios - trends in: Liquidity Management efficiency Financing Profitability

23. financial statements demystified Liquidity Ratio p 234 & 235 current assets current liabilities Purposeability to pay debts when due Where to find figuresbalance sheet; overdraft in borrowings note Current ratio = Rules of thumb ≥1.5

24. financial statements demystified Liquidity Ratios - Smith Family Years20082009201020112012 Current ratio1.71.51.41.31.0 Years20082009201020112012 Current ratio1.71.51.41.31.0 Rule of thumb ≥1.5

25. financial statements demystified Management Efficiency Ratio p 237, 239, 241, 243 Purposerevenue from assets Where to find figuresbalance sheet or notes, and income statement or notes Asset utilisation = revenue assets Rule of thumb 2 for retailer 1 for manufacturer

26. financial statements demystified Management Efficiency - Smith Family Rule of thumb 2 - retailer 1 - manuf. Years20082009201020112012 Asset utilisn1.92.01.51.81.9 Years20082009201020112012 Asset utilisn1.92.01.51.81.9

27. financial statements demystified Financing Ratios p 244, 247, 248 Interest cover = EBIT interest expense Purposeprofit to interest, proportions of funding Where to find figures balance sheet or notes, and income statement or notes Debt to equity = total liabilities equity Interest-bearing debt to equity interest bearing debts equity = Rules of thumb ≥3 ≤1 ≤0.5

28. financial statements demystified Financing Ratios – Smith Family Rules of thumb ≥3.0 ≤1.0 ≤0.5 Years20082009201020112012 Int coverNMNMNMNMNM Debt/equity0.50.60.60.81.3 Int bear debt0.10.10.10.00.0 Years20082009201020112012 Int coverNMNMNMNMNM Debt/equity0.50.60.60.81.3 Int bear debt0.10.10.10.00.0

29. financial statements demystified Profitability Ratios p 252, 253, 256, 258 Purposesurplus from revenue, assets and equity Where to find figures income stmt or notes - numerator, income stmt or balance sheet - denominator EBIT margin = EBIT sales x 100 EBIT total assets ROA = x 100 ROE = Surp b unus equity x 100

30. financial statements demystified Profitability Ratios - Smith Family Years20082009201020112012 EBIT mgn1.1%-3.1%1.1%-0.2%-5.7% ROA2.1%-6.2%1.6%-0.3%-11.0% ROE2.4%-10.7%1.9%-1.1%-25.0% Years20082009201020112012 EBIT mgn1.1%-3.1%1.1%-0.2%-5.7% ROA2.1%-6.2%1.6%-0.3%-11.0% ROE2.4%-10.7%1.9%-1.1%-25.0%

31. financial statements demystified Size Ratios - Smith Family Years20082009201020112012 Revenue change-5.1%-13.7%16.2%3.2% Assets change-13.1%18.2%-4.5%-3.2% Years20082009201020112012 Revenue change-5.1%-13.7%16.2%3.2% Assets change-13.1%18.2%-4.5%-3.2%

32. financial statements demystified

33. p 24 Summary of the Three Financial Statements Cash Flow Statement Formula P = R - E where: R is revenue E is expenses Formula Cash: In (Out) History of revenue less expenses over a year Snapshot at balance sheet date History of cash in less cash out over a year Formula L + E = A or E = A - L where: A is assets L is liabilities E is equity Income Statement Balance Sheet

34. financial statements demystified